McGilla Golf has decided to sell a new line of golf clubs. The company would lik
ID: 2726981 • Letter: M
Question
McGilla Golf has decided to sell a new line of golf clubs. The company would like to know the sensitivity of NPV to changes in the price of the new clubs and the quantity of new clubs sold. The clubs will sell for $880 per set and have a variable cost of $480 per set. The company has spent $158,000 for a marketing study that determined the company will sell 62,000 sets per year for seven years. The marketing study also determined that the company will lose sales of 10,300 sets of its high-priced clubs. The high-priced clubs sell at $1,180 and have variable costs of $780. The company will also increase sales of its cheap clubs by 11,800 sets. The cheap clubs sell for $520 and have variable costs of $270 per set. The fixed costs each year will be $9,180,000. The company has also spent $1,190,000 on research and development for the new clubs. The plant and equipment required will cost $29,260,000 and will be depreciated on a straight-line basis. The new clubs will also require an increase in net working capital of $1,380,000 that will be returned at the end of the project. The tax rate is 34 percent, and the cost of capital is 12 percent. What is the sensitivity of the NPV to each of these variables? (Do not round intermediate calculations and round your final answers to 2 decimal places, e.g., 32.16.)
NPV NPV/P $ NPV/Q $
Explanation / Answer
Assume the Price and qunatities vary +/- 10% for best and worst cases only for new club sets McGilla Golf club Price Details Best Case New Sets High Price Cheap club Unit Selling Price 968 1,180 520 UnitVAriable cost 480 780 270 Unit Contribution margin 488 400 250 Units of sales/Loss of sales 62,000 (10,300) 11,800 Yearly Contribution margin 30,256,000 (4,120,000) 2,950,000 Yearly Incremental Contribution 29,086,000 Price Details Worst Case Sales Details worst New Sets High Price Cheap club Unit Selling Price 792 1,180 520 UnitVAriable cost 480 780 270 Unit Contribution margin 312 400 250 Units of sales/Loss of sales 62,000 (10,300) 11,800 Yearly Contribution margin 19,344,000 (4,120,000) 2,950,000 Yearly Incremental Contribution 18,174,000 Qty Details Best Case New Sets High Price Cheap club Unit Selling Price 880 1,180 520 UnitVAriable cost 480 780 270 Unit Contribution margin 400 400 250 Units of sales/Loss of sales 68,200 (10,300) 11,800 Yearly Contribution margin 27,280,000 (4,120,000) 2,950,000 Yearly Incremental Contribution 26,110,000 Qty Details Worst Case Sales Details worst New Sets High Price Cheap club Unit Selling Price 880 1,180 520 UnitVAriable cost 480 780 270 Unit Contribution margin 400 400 250 Units of sales/Loss of sales 55,800 (10,300) 11,800 Yearly Contribution margin 22,320,000 (4,120,000) 2,950,000 Yearly Incremental Contribution 21,150,000 NPV Best Case_price change Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Equipment Cost (29,260,000) NWC investment (1,380,000) 1,380,000 Yearly Incremental Contribution 29,086,000 29,086,000 29,086,000 29,086,000 29,086,000 29,086,000 29,086,000 Less Fixed cost (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) Less Depreciation (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) Taxable Income 15,726,000 15,726,000 15,726,000 15,726,000 15,726,000 15,726,000 15,726,000 Tax @34% 5,346,840 5,346,840 5,346,840 5,346,840 5,346,840 5,346,840 5,346,840 Post Tax Income 10,379,160 10,379,160 10,379,160 10,379,160 10,379,160 10,379,160 10,379,160 Add Back depreciation 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 Net Cash flow (30,640,000) 14,559,160 14,559,160 14,559,160 14,559,160 14,559,160 14,559,160 15,939,160 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (30,640,000) 12,999,250 11,606,473 10,362,923 9,252,609 8,261,258 7,376,124 7,210,067 NPV = 36,428,704 NPV Worst Case_price Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Equipment Cost (29,260,000) NWC investment (1,380,000) 1,380,000 Yearly Incremental Contribution 18,174,000 18,174,000 18,174,000 18,174,000 18,174,000 18,174,000 18,174,000 Less Fixed cost (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) Less Depreciation (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) Taxable Income 4,814,000 4,814,000 4,814,000 4,814,000 4,814,000 4,814,000 4,814,000 Tax @34% 1,636,760 1,636,760 1,636,760 1,636,760 1,636,760 1,636,760 1,636,760 Post Tax Income 3,177,240 3,177,240 3,177,240 3,177,240 3,177,240 3,177,240 3,177,240 Add Back depreciation 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 Net Cash flow (30,640,000) 7,357,240 7,357,240 7,357,240 7,357,240 7,357,240 7,357,240 8,737,240 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (30,640,000) 6,568,964 5,865,147 5,236,738 4,675,659 4,174,696 3,727,407 3,952,284 NPV = 3,560,894 NPV sensitivity with Price change Best Case Worst Case Change So NPV details Are 36,428,704 3,560,894 32,867,809 Price change in new sets 968 792 176 Change in NPV/$ change in price= 186,749 per $ NPV Best Case_Qty change Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Equipment Cost (29,260,000) NWC investment (1,380,000) 1,380,000 Yearly Incremental Contribution 26,110,000 26,110,000 26,110,000 26,110,000 26,110,000 26,110,000 26,110,000 Less Fixed cost (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) Less Depreciation (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) Taxable Income 12,750,000 12,750,000 12,750,000 12,750,000 12,750,000 12,750,000 12,750,000 Tax @34% 4,335,000 4,335,000 4,335,000 4,335,000 4,335,000 4,335,000 4,335,000 Post Tax Income 8,415,000 8,415,000 8,415,000 8,415,000 8,415,000 8,415,000 8,415,000 Add Back depreciation 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 Net Cash flow (30,640,000) 12,595,000 12,595,000 12,595,000 12,595,000 12,595,000 12,595,000 13,975,000 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (30,640,000) 11,245,536 10,040,657 8,964,872 8,004,350 7,146,741 6,381,019 6,321,580 NPV = 27,464,756 NPV Worst Case_Qty Change Details Year 0 Year 1 Year 2 Year 3 Year 4 Year 5 Year 6 Year 7 Equipment Cost (29,260,000) NWC investment (1,380,000) 1,380,000 Yearly Incremental Contribution 21,150,000 21,150,000 21,150,000 21,150,000 21,150,000 21,150,000 21,150,000 Less Fixed cost (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) (9,180,000) Less Depreciation (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) (4,180,000) Taxable Income 7,790,000 7,790,000 7,790,000 7,790,000 7,790,000 7,790,000 7,790,000 Tax @34% 2,648,600 2,648,600 2,648,600 2,648,600 2,648,600 2,648,600 2,648,600 Post Tax Income 5,141,400 5,141,400 5,141,400 5,141,400 5,141,400 5,141,400 5,141,400 Add Back depreciation 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 4,180,000 Net Cash flow (30,640,000) 9,321,400 9,321,400 9,321,400 9,321,400 9,321,400 9,321,400 10,701,400 PV factor @12% 1 0.893 0.797 0.712 0.636 0.567 0.507 0.452 PV of Cash flows (30,640,000) 8,322,679 7,430,963 6,634,788 5,923,918 5,289,213 4,722,511 4,840,770 NPV = 12,524,842 NPV sensitivity with Price change Best Case Worst Case Change So NPV details Are 27,464,756 12,524,842 14,939,913 Price change in new sets 68,200 55,800 12,400 Change in NPV/$ change in price= 1,205 per unit